A chance to change for the better
In the first of a two-part series, The Mayo News gives readers an exclusive insight into what the Government’s new economic adviser thinks about the recession and the way out of it
“PEOPLE should use the recession to change the way things are done for the better. Hunkering down and bracing will not be of any benefit, so use this once-in-a-century opportunity to change the way things are done.”
This was among the closing sentiments of Dr Alan Ahearne speaking in Westport earlier this month, where he urged people to use human capital and change structures to improve productivity in these bleak financial times. In one of his last public talks before he took up a position as adviser to Minister for Finance Brian Lenihan last week, Dr Ahearne was speaking at the AGM of Westport Chamber of Commerce in Hotel Westport. Over the course of an hour he gave a comprehensive insight into what he feels has caused the financial turmoil Ireland and the world are currently experiencing, and where the solutions may lie.
He began with some hard-hitting facts, and showed graphs to illustrate that in terms of economic activity and the pace of decline, the world is currently on par with the situation as it existed at this stage of The Great Depression.
Dr Ahearne used the ‘TED Spread’ to illustrate this point and show just how bad the situation became when financial giants became dependent on Government support in the US last year. The TED Spread reflects what banks are charging each other for lending by comparison with what they are charging the US Government. It is a complex system but is taken as an indicator of the perceived risk in the general economy, and is used as a marker of the financial strength of banks.
At its lowest, the TED Spread can be around 20 basis points – as it was in early 2007. A TED Spread this low occurs when banks are seen as strong and in good financial health, with a low risk of default or bankruptcy. Therefore, other banks are willing to lend them money at nearly the same risk-free interest rates paid by the US Government. By contrast, the TED Spread stood at 330 basis points in early October 2008, after a series of bankruptcies among banks and other financial institutions that occurred as part of the financial crisis in the US. On October 10, 2008 the TED Spread hit a record high of 460 basis points (five per cent), reflecting a huge breakdown in inter-bank lending. The ramifications of these events in the USA were quickly felt by markets around the world.
In the interim some of this stress has receded (back to one per cent) from these unprecedented levels, but it is still hovering at a crisis point according to Dr Ahearne, who described the entire situation by saying that the world’s financial markets suffered a ‘cardiac arrest’ last summer and have not yet recovered. The importance of this is that it is hindering global attempts to reverse the recession and has contributed significantly to the credit crunch and the ongoing financial crisis.
“Across the globe this stress has gone into the real economy where people spend money, and the world is currently in the worst economic crisis since the 1930s,” he said, adding that we are experiencing an unusual global economic crisis as downturns have traditionally been caused by rising interest rates or oil, whereas the present downturn has come as a result of financial markets and the failure of financial systems.
In comparing the current health of the financial markets to trends during past crises, Dr Ahearne showed that during the oil crisis of 1973 the value of the world’s markets dropped 48 per cent in 21 months. During the dot-com crash earlier this decade they fell by 49 per cent, while the fall-out from The Great Depression saw the value of financial markets drop by 90 per cent over 34 months.
The current downturn already had life, but the bailouts of last summer in the USA deeply worsened the situation around the world, and 17 months after the downturn began, the value of the world’s financial markets is down 57 per cent. This puts the global economy in exactly the same position as where it was at this point in The Great Depression.
Dr Ahearne said that newly-industrialised Asian economies like Korea, Hong Kong and Malaysia are being worst-hit because they are small open trading nations, and ‘the more open and dependent on trade you are the more you get clobbered.’ He added that Ireland is also getting ‘badly clobbered’ as we are a small open trading economy. The Middle East is escaping the brunt of the problem (having oil always helps) while the USA is closer to the middle of the scale, with the UK, Ireland and central and Eastern Europe closer to the bottom.
However, it is not all bad news, and according to the man tasked with trying to help Ireland out of the mess we are currently languishing in, the ongoing co-ordinated global fiscal expansion and stimulus plans are a totally different response to the the reaction in 1929, and could make all the difference.
“Ben Bernake [Current Chairman of the Federal Reserve] said if they can fix the US financial system then America will recover next year and if that happens the rest of the world will follow shortly. We will then avoid a repeat of The Great Depression and will just have a bad 2009,” he said.
In the meantime, Dr Ahearne is subscribing to the belief of Barack Obama’s White House Chief of Staff, Rham Emanuel, that ‘one should never let a good recession go to waste.’
“People need to go beyond applying pressure to and squeezing more out of existing models,” he said. “Inefficiencies are let go in good years but now is the time to change the system, change the structures, and improve productivity.
The Irish problem, bursting the property bubble and the proposed solution.